Japanese government debt will soar to 400pc of GDP within 30 years unless
policymakers implement vital reforms, OECD warns

Japan's debt pile will grow out of control unless policymakers take steps to reform the country's tax system and address its shrinking labour force, the Organisation for Economic Co-operation and Development has warned.

The OECD said gross government debt, which currently stands at a record 226pc of gross domestic product (GDP), would balloon to more than 400pc by 2040 if the government did not carry out reforms.

Angel Gurria, the OECD's secretary-general, said monetary stimulus and stronger growth alone would not be enough to haul the economy out of its two-decade malaise.

"Japan’s future prospects depend on ensuring fiscal sustainability over the long term. With a budget deficit of around 8pc of GDP, the debt ratio is set to rise further into uncharted territory," he said.

"A detailed and credible fiscal plan is essential to maintain market confidence and to achieve a primary surplus by fiscal year 2020," said Mr Gurria.

The OECD said the government would need to implement a squeeze of 7pc of GDP - the equivalent of raising consumption tax from 8pc to 22pc - just to keep Japan's debt ratio at its current level.

Even with a hike of this magnitude, if growth and inflation remained subdued at around 1pc and 0.5pc respectively, the OECD said Japan's debt ratio would remain above 200pc of GDP by 2040. Structural reforms matched with real growth of 2pc and inflation close to the Bank of Japan's 2pc target would help the ratio to decline to nearly 100pc.

Shinzo Abe, Japan's prime minister, launched his three-pronged plan of quantitative easing, fiscal stimulus and structual reform more than two years ago. The policies - dubbed "Abenomics" - were aimed at smashing deflation and boosting the economy, and have helped to push down the country's borrowing costs.

However, Mr Gurria said monetary policy had its limits.

"The first arrow of [QE] is working, but there are limits," he said. "Structural reforms are not in the hands of central banks."

"The hike in the consumption tax to 10pc, which was postponed until 2017, should be implemented as planned," said Mr Gurria. "Even at 10pc, the rate will remain about half the OECD average [of 19.1pc].

"Further revenues could come from raising the consumption tax closer to the OECD average, as well as broadening the personal and corporate income tax bases and increasing environmental taxes."

The OECD also urged Japan to boost labour productivity, encourage more women into the workforce and remove trade barriers, stressing that the structual reforms that make up the "third arrow" of Abenomics have lagged the first two arrows of monetary and fiscal stimulus.

"The third arrow of Abenomics is its most crucial component, without which the unprecedented monetary expansion and the fiscal effort will not succeed in putting Japan on a path to faster growth and fiscal sustainability," it said.